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Trade Facilitation

I recently had the opportunity of attending a five-week course on Trade Facilitation by the United Nations Institute for Training and Research (UNITAR). At the end of the course I had to ask myself what exactly is wrong with us in the developing world especially, ECOWAS region. Despite evidences of positive impact of best practices on GDP we still slow or deliberately delaying implementing the regulations and agreements. I will be sharing some of the information provided during the session.

Introduction

In the era of globalization, it is highly significant for countries and businesses to deliver goods and services on time and at low costs. High transportation costs, complex document requirements and custom clearance delays at national borders can significantly deter the country’s export competitiveness and consequently, their participation in global economy. In the past few years, significant tariff reductions, resulting from continuous trade liberalization, in most countries of the world together with the advancements in technology, transportation and communication has contributed immensely in reducing international trading costs. Recently, however, trade facilitation has been emerging as an important strategy in reducing trade transaction costs. For the past one decade, the issue of trade facilitation, which is generally referred to as reduction of trade-transaction costs resulting from unnecessary and complex administrative procedures at national borders, has become a highly debatable issue.

It is often argued that trade facilitation has a favorable impact on cross-border trade expansion (by promoting both imports and exports) and thus contributes to economic development. This positive relationship between trade and economic development also finds support from empirical studies (Sachs and Warner, 1995). In fact, empirical literature has also supported the argument that trade facilitation helps low- and-middle income countries to decrease poverty and inequality, and to increase their employment and per capita (GDP) income (Viet, 2015; Dennis, 2006; ESCAP, 2009; Zaki, 2011). Clearly thus, efforts have been made by various regional and international organizations to promote awareness amongst countries about these trade-related transaction costs and to facilitate multilateral rule making and regional or pluri-lateral coordination regarding trade facilitation.

The concept of ‘Trade Facilitation’, its principles and benefits

Trade facilitation is generally referred to as the reduction of costs associated with trade transactions which usually results from unnecessary and complex administrative and technical procedures or regulations adopted by countries on the cross-border movement of goods and services. There is, however, no precise and uniformly agreed definition of ‘trade facilitation’, which often varies in its scope depending on the context and involved parties. In a narrower sense, it could be defined as a process of reducing transaction costs related to international trade by simplifying customary and technical regulations (United Nations, 2002). The World Trade Organization defines trade facilitation as ‘the simplification and harmonization of international trade procedures’ where trade procedures are the ‘activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade’ (WTO 1998).

In the recent years, however, the scope of the term ‘trade facilitation’ has been broadened to include even the domestic policies and institutional structures of a country within its scope in which the trade transactions take place. This relates to, for instance, transparency, governance structure and human resource department of regulatory bodies to provide a favorable environment for trade transactions. The modern definitions of ‘trade facilitation’ also encompasses technology infrastructure, harmonization of standards, and conformance to international norms, which arguably all facilitate trade transactions.

Similar broader approach to the term ‘trade facilitation’ has been taken by the Organization for Economic Cooperation and Development (OECD) when it defines trade facilitation to ‘cover all the steps that can be taken to smooth and facilitate the flow of trade’ (OECD, 2005). The OECD has thus used the term to ‘cover all sorts of non-tariff barriers, including product testing and impediments’ (ibid). As further interpreted by Sourdin and Pomfret (2012), the OECD definition of ‘trade facilitation’ ‘covers not only international trade procedures and associated information flows and payment along the entire supply chain but also includes some behind-the- border procedures, such as standards and conformity assessment measures, business facilitation, e-commerce, trade finance and logistics services’. Clearly thus, the concept of trade facilitation nowadays covers a wider variety of measures and activities. Many organizations tend to adopt a wider definition that covers lot of activities which facilitate trade transactions.

Principles of ‘Trade Facilitation’

There are four fundamental principles of trade facilitation that are generally recognized in literature: transparency, simplification, harmonization, and standardization.

Transparency

‘Transparency’ is an important pillar of trade facilitation. It refers to the openness of government policies affecting trade and accountability of government’s and administrative actions. The principle of transparency can be applied to a wide range of trade policies affecting border and “behind-the-border’ procedures, which may include laws, regulations and administrative decisions of general application, budgets, procurement designs and meetings (The World Bank, 2007; UNECE, 2012).

Clearly, transparency is not only restrictive to at-the-border and behind-the-border policies that have an impact on trade transactions but also the way in which these policies are designed and administered. Relevant stakeholders and the general public should be invited to take part in the legislative process to express their opinions and perspectives prior to the enactment of the proposed law. Their opinions and perspectives should be considered by the drafters before finalizing any policy/law affecting trade. Moreover, the regulatory information should also be properly published and disseminated amongst the public so that they are fully aware of any new amendments, reforms or changes to law and get enough time to take appropriate steps to comply with the new or amended law and regulations.

Simplification

Simplification is a process of simplifying trade procedures and policies by eliminating all unnecessary elements and duplications in trade formalities, processes and procedures (UNECE, 2012). Simplification helps involved parties to easily identify, assess and comply with the regulations. Reforms related to simplification usually relate to: streamlining documentary requirements for import/export transactions; reducing the number of border agencies to be dealt with by importer/exporters; removing any “hidden” trade barriers; and limiting unofficial payments (World Bank, 2007).

Harmonization

Harmonization is the process of aligning national procedures, operations and documents with international conventions, standards and practices. It involves an initiative by countries to adopt and implement same standards and practices as promulgated at international level or as a part of regional integration process.

Standardization

Standardization is the process of developing formats for practices and procedures, documents and information internationally agreed by various parties (UNECE, 2012). Standardization eventually facilitates harmonization of procedures and practices by aligning the documents and information.

Why does ‘trade facilitation’ matters?

A few questions that have often been asked about trade facilitation are: what are the benefits of trade facilitation? Are there any empirical studies conducted which support trade facilitation and its advantages? Is there any evidence that trade facilitation contributes to economic development, or may be, to the reduction of poverty or inequality, or may be in increasing employment or a country’s per capita income? This section of the chapter will review the existing literature and studies to assess various arguments in favor and against trade facilitation.

Several studies examine the impact of trade facilitation on GDP and economic development and majority of them found a positive effect of trade. According to a study conducted by Duval and Utokhtam (2009), trade expansion resulting from trade facilitation may lead to 2.5 per cent increased growth of GDP per capita in Asia and the Pacific countries. Similarly, Kinnman and Lodefalk (2007) study found that depending upon the level of liberalization (goods, services and agriculture) and trade facilitation, global income may increase with 0.2-0.7 per cent of initial GDP, in which the highest contribution would be of the trade facilitation. Hufbauer and Schott (2013) also noted that the estimated $950 billion increase in two-way trade, because of significant trade facilitation, delivers GDP increases of approximately $440 billion. For developing countries, the estimated $1 trillion increase in two-way trade delivers GDP increases of $520 billion. Overall, the potential trade expansion from a far-reaching trade facilitation agreement could translate to world GDP increases of $960 billion annually (Hufbauer and Schott, 2013).

Several studies have also highlighted the positive impact of trade facilitation on country’s trade competitiveness, resulting gains in international trade flows (APEC 1999; Hertel and Keeney 2006; Duval and Utoktham 2009). Inefficient ports and inefficient procedures relating to trade, which causes delay in delivery of goods, could heavily damage country’s export flows, adversely affecting the ability of exporters and producers to meet their foreign supply commitments. A report by the United Nations (2002) estimated that high administrative costs resulting from complex customary procedures and requirements accounts for 7%-10% of the value of global trade. On the contrary, efficient ports, customs and e-business can have a positive effect on trade flows. This has been supported by the study of Wilson, Mann and Otsuki (2005) who examined the relationship of trade facilitation and international trade on Asia-Pacific countries and by Clark, Dollar and Micco (2004) who examined the positive impact of trade facilitation on countries’ exports to the US.

Impact of trade facilitation on poverty reduction and achieving development goals has also been analyzed by scholars. Rippel (2011), for instance, argues that trade facilitation can become a catalyst for poverty reduction ‘by creating more and broad based jobs and income opportunities’. This argument has been supported by the study of Viet (2015), where it has been established that countries which have complex trade documentation requirements and take longer to clear goods for import and export have a higher poverty rate. The study presented some very interesting results when it argues that the effective implementation of trade facilitation measures can help decrease the poverty gap. In the words of Viet:

“One additional document for imports can be associated with an increase of 0.77 percentage point in the poverty rate. One additional day in the time needed for exports and imports might increase the poverty rate by 0.49 and 0.47 percentage points, respectively.”

The literature thus clearly establishes that trade facilitation can help boost economic growth and contributes towards poverty reduction and inequality reduction. Furthermore, research and studies on trade facilitation also particularly establishes the benefits of trade facilitation for developing countries. Majority of these studies illustrate the burden associated with trade costs and delays at customs due to complex administrative procedures and document requirements which significantly hinders the trade performance of developing countries.

According to the World Bank Report (2012), exports from developing countries require nearly twice as many documents and six times more signatures than in developed countries, which arguably hinders the efficiency and pace of international transaction transactions. It is often argued that trade facilitation reforms would be particularly beneficial for developing countries where, on an average, it takes three times as many days to export goods as in developed countries (UNECE, 2012; Viet, 2015). Recent studies highlighted that trade facilitation can reduce transaction costs up to 14.5% per cent for low-income countries, 15.5% for lower-middle income countries and 13.2% for upper middle income countries (Moise and Sorescu, 2013). Overall, it has been estimated by the recent OECD study that the trade facilitation can reduce worldwide trade costs by between 12.5% to 17.5% (OECD, 2015).

According to the study conducted by Dollar, Hallward-Driemeier and Mengistae (2006), the more the number of days required clearing goods through customs, the more negative impact it has on exports of developing countries. According to the World Bank (2014) Doing Business Report, the number of documents involved in any export transaction range from 2-11 documents and the number of days involved to clear exports range from 6-86 days. For imports, the documents range from 2-17 and number of days for clearance ranges from 4-130, varying from country to country.

ECOWAS consists of 15 member states – Benin, Burkina Faso, Cabo Verde, Cote d’Ivoire, the Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo. Countries comprising ECOWAS are not only diverse in culture and geographical size, but there is also a lot of economic disparity within the region where the GDP per capita ranges from USD 800 in Niger to USD 4,400 in Cape Verde (World Bank, 2015). Nigeria, which is the economic hub of the region, has been reported to be accounting for 75% of ECOWAS’s GDP in 2015 (inAfrica24, 2015).

Since its very creation in 1975, ECOWAS has identified trade facilitation, both with regional and global partners, as an essential priority, considering increasing trade volumes, and aims at promoting regional integration. Policy makers have increasingly acknowledged the imperative of regional integration within the ECOWAS, considering small market size of member states, small population size (except in Nigeria), landlocked geography and weak economies (Amoako-Tuffour, 2016). However, an interesting question that needs to be answered here is: how far this aspiration of overall regional development and integration has been achieved in the last 40 years, or is it still as aspiration?

Since 2000 the value of exports from ECOWAS countries has grown by 260 percent, from $34.5 billion in 2000 to nearly $124 billion in 2014 (USAID, 2015; Amoako-Tuffour, 2016). Nonetheless, the volume of exports between ECOWAS member states has remained steady, showing a much lesser growth of an increase from 7% to 11% only (USAID, 2015; Torres and Seters, 2016).

Sadly, however, despite all the efforts made by ECOWAS for the past 40 years, intra-regional trade between ECOWAS member states has been low, as compared to inter-regional trade. In 2014, exports were estimated to be less than 10 percent between ECOWAS member states. Even within the ECOWAS member states, there was a lot of variation in their intra-regional trading participation, particularly in exports. Nigeria, for instance, exported highest volume of goods (largely in the form of crude oil) and services to other ECOWAS member states, valued more than $5 billion, but constituting only less than 10% of total Nigerian exports. In the same year, intra-regional exports from Senegal, Togo and Niger constituted less than 10% of the total ECOWAS exports; nonetheless, these countries relied on other ECOWAS member states for more than 40% of their exports. A few countries rely on only two or three commodities for 75% of their exports (Amoako-Tuffour, 2016; Schmeig, 2015).

Issues

Various studies have found that within ECOWAS, both the processes, and degree of regional integration have lagged behind expectations, and many political commitments have either not been translated into policy and regulatory reforms, or the reforms are not effectively implemented. The ECOWAS region thus remains weekly integrated, with continuing trade barriers (for instance, where restrictive rules of origin are not met) and substantial non-tariff barrier. The question now is, what are the challenges faced by ECOWAS in achieving its aim of enhancing regional integration and co-operation, and free movement of goods within the region, and what steps need to be taken by ECOWAS to ensure effective implementation of various measures taken to facilitate cross-border trade? Identified challenges include:

Fragile Political and Security Situation in some ECOWAS member states

Informal Trade

Absence of real political commitment to the regional integration process

Limited awareness of regional agreements and protocols

ELTS Inherent Shortcomings

Bribery and Corruption

Summary

There is no doubt about the need for more effective trade facilitation reforms in the region. Although inter-regional trade has developed, the ECOWAS intra-regional trade for the past decades has not shown any significant growth, which is due to various reasons listed above, and lack of good quality infrastructure, whether rail, road or air, to facilitate trade. ECOWAS has taken various steps to improve trade facilitation in the region through the establishment ELTS (ECOWAS Trade Liberalization Scheme), ECOWAS CET (Customs External Tarrif), Regional Road Transport and Transit Facilitation (RRTTF) Programme and various other specific initiatives. Nonetheless, it is evident that the region continues to face significant political and economic barriers which need to be overcome to achieve ECOWAS objective of full regional economic integration and freedom of trade within the region.

Forum Discussion:

My two pence views are that the main challenges in the ECOWAS region are: lack of political will and corruption. If these two issues can be tackled trade facilitation will improve, there will be increase in employment, and increase in revenues both to the government and the private sector. Let’s hear your views.

Dennis, A. (2006). The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East North Africa Region. World Bank Policy Research Working Paper no. 3837. Washington, DC: The World Bank.

Duval, Y., and Utoktham, C. (2009). Behind the Border Trade Facilitation in Asia-Pacific: Cost of Trade, Credit Information, Contract Enforcement and Regulatory Coherence. Working Papers no. 6709. Bangkok: United Nations Economic and Social Commission for Asia and the Pacific.

ESCAP (Economic and Social Commission for Asia and the Pacific) (2009). Studies in Trade and Investment no. 66. Impact of Trade Facilitation on Export Competitiveness: A Regional Perspective. Bangkok: Economic and Social Commission for Asia and the Pacific.

Torres, C. and Seters, J. (2016). Overview of trade and barriers to trade in West Africa: Insights in political economy dynamics, with particular focus on agricultural and food trade. Discussion Paper No. 195, ECDPM.

United Nations (2002). Trade Facilitation Handbook: For the Greater Mekong Subregion. New York: Economic and Social Commission for Asia and The Pacific.